Abstract

With the collapse of communism, some former communist States of Eastern Europe managed to muddle through their way to a market economy and entered the European Union. This brought about the acceleration of Foreign Direct Investment (FDI) among the European economies and accelerated the globalization process. Although there is plenty of research on FDI and trade among countries, the aim of this chapter is to analyze how trade between Portugal and the Czech Republic have evolved over form 2000 until 2015. The chapter seeks to complement previous studies on FDI and trade as Portugal and the Czech Republic are part of the European Union, but have had different historical, cultural, and economic paths. The main conclusion of the chapter is that trade between both countries has grown significantly. The main reason affecting trade between both countries is the economic unrest Portugal has been through since 2008.

Background

Studies about international trade, internationalization and FDI are abundant. Analyzing how the theories about internationalization have evolved, Ribau, Moreira, and Raposo (2015) conclude that for decades theories analyzed how trade and FDI between countries occurred. Subsequently, there was a huge focus on multinational firms, and only after the 1980s onwards focus on internationalization shifted to Small and Medium-sized firms (SMEs) and how important they are to international business.

International trade can be defined as the exchange of goods and services that connect people, businesses, and countries along international borders in global processes of production and consumption influencing, directly and indirectly, the way everybody lives live.

As a result of international trade, FDI has become one of the most significant factors for economic development, as it allows the international flow of goods among countries, enabling the recovery and / or modernization of the economies (Razin & Sadka, 2007). FDI is one of the results and, at the same time, one of the major drivers of international trade, where multinational and small and medium-sized enterprises (SMEs) started to play a leading role.

FDI allows not only the flow of goods but also the creation of jobs. One consequence of this increasing flow of FDI is that countries seek to implement economic policy measures to attract investment flows (Chenaf-Nicet & Ronjier, 2016). Moreover, as FDI embodies technology and know-how, there are potential benefits that are not very explicitly exposed as technology transfers, productivity gains, managerial and know-how transfers, and access to broader markets (Blomström & Kokko, 1998).

Hanson (2001) supports that FDI generates positive spillovers for host countries. However, Lipsey (2002) finds that there is no consistent relation between the size of inward FDI and GDP or growth. Markusen and Venables (1999) defend that FDI could harm local industry.

Moreira (2008) defends that there are positive effects from FDI as there are positive technology accumulation among SMEs supplying their multinational clients. Görg and Greenway (2004) support that spillovers from foreign to domestically owned firms are mostly negative. Although there appears to be no consensus among scholar about the externalities of FDI, most countries are looking forward to increasing their international trade, as well as their share of FDI activities.